There’s one piece of good news for Naked Brand Group (NASDAQ:NAKD) stock. The company at least has taken advantage of its soaring stock price.

The gains, apparently driven by the same Reddit traders who have moved a number of questionable stocks in this market, have been staggering. On Dec. 31, NAKD stock closed at 19 cents. On Jan. 29, at the height of the Reddit rally, it had gained over 700%, closing at $1.65.

The spike has helped Naked in two ways. First, it’s removed the threat of delisting from the Nasdaq Exchange, at least for now. With a share price consistently under $1, Naked would have to execute another reverse split, after a 1-for-100 adjustment in December 2019.

Second, it’s allowed the company to raise capital. Naked sold $50 million worth of stock at $1.70 per share late last month. For a company with significant bankruptcy risk — Naked had a so-called “going concern” warning in recent financials — that capital is inordinately helpful.

So an investor could reasonably argue that the case for NAKD stock is better after the pump than before. The problem is that it’s still not remotely good enough to support the current share price.

The Restructuring Plan

In January, with NAKD stock already gaining, the company announced what it called a “transformative business restructuring plan.”

Naked is going fully digital. It plans to sell its brick-and-mortar Bendon subsidiary to its existing management (including Naked’s CEO).

That leaves Naked as a purely online play, anchored by its Frederick’s of Hollywood (FOH) Online business. Sounds good, right?

But there are a few problems. Naked isn’t getting any cash for Bendon. In fact, according to a recent prospectus filed with the U.S. Securities and Exchange Commission, it has to pay off 15 million NZD (about $11 million) in debt. The Bendon acquirers then get the business for free in exchange for assuming its liabilities.

For three years, Naked does get an undisclosed percentage of Bendon’s net profits. And if Bendon is sold again, Naked gets a piece of that deal.

But neither option is all that valuable. Bendon is unprofitable, as Naked itself notes. Another sale within three years is unlikely, and given that Naked is paying to get the business of its books, such a sale is not going to garner much in the way of value.

So this isn’t a dramatic deal. Naked is basically selling stock to raise capital, then using some of that cash to make one of its biggest problems go away.

What’s Left

On its face, that move sounds good. The brick-and-mortar business has been hit by the novel coronavirus pandemic. E-commerce is hot.

But what is that business? It’s FOH. That’s an old, dated lingerie brand. Naked doesn’t even own that brand; rather, it’s the exclusive online licensee for the FOH website.

That e-commerce is business that underpins NAKD stock going forward. And it’s not particularly impressive financially, either.

Admittedly, Naked’s E-commerce segment had a decent first half of fiscal 2020 (the six months ending Jul. 31). Revenue rose over 15%. The operating loss in the segment improved.

But given pandemic tailwinds, most other e-commerce companies have done better. And while the growth sounds good, this business is still rather small. E-commerce revenue over the last 12 months (though July 31, the last period for which we have data) totals just 34.2 million NZD.

That’s only about $25 million. $20 million of that comes from the U.S., per the restructuring plan announcement. Meanwhile, the business remains unprofitable, even on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.

The NAKD Stock Price

Now, even with those concerns, an investor still could build a reasonable bull case for the business. The capital raise takes care of balance sheet problems, and potentially provides cash to invest in growth going forward. FY20 performance has improved. There’s new management. With annual EBITDA loss only about $1 million, FOH could turn cash flow-positive with a few improvements.

But even with NAKD stock pulling back to the Feb. 18 close of $1.21, there isn’t a reasonable bull case at this price. Bear in mind that according to a recent prospectus, after the stock offering, Naked will have 476 million shares outstanding.

That in turn means the company has a market capitalization of $491 million, and an enterprise value still over $500 million. That’s more than 20x revenue.

That’s a simply absurd multiple for a business that could only grow 15% with pandemic tailwinds, and that posted essentially zero growth in the two years before that.

There’s another way to look at it, however. Naked itself only acquired FOH in late 2018. According to filings with the SEC, as consideration, Naked forgave $9.9 million in debt and issued around 3.8 million shares, which at the time traded at $2.20 (note that price is before the reverse split).

The total consideration paid for the business? $18.2 million. The valuation on that business now? Again, over $500 million.

That rise isn’t coming because e-commerce is hot, or because FOH is executing well.

It’s coming because NAKD stock remains caught up in a trading frenzy. Once that frenzy ends, the stock has nowhere to go but down.

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On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. 

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